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Bankruptcy is a federal law that allows individuals over the age of 18, married couples, and businesses to eliminate or restructure their past due debts when they have financial difficulties paying their bills. Because it is a federal law, it applies throughout the United States. Individuals experiencing significant financial difficulty may consider bankruptcy as an option.
When you file bankruptcy, you or your attorney must determine which bankruptcy type best suits your financial situation and which type you qualify for. There are generally two different types of bankruptcy for individuals. They are:
- Chapter 7 Bankruptcy and
- Chapter 13 Bankruptcy
Chapter 7 Bankruptcy is the most common form of bankruptcy. This type of bankruptcy is known as "straight" bankruptcy. When filing this type of bankruptcy you may seek the help of an attorney, legal professional, choose to "go it alone" or use a self-help document preparation service.
It is critical that you or your attorney be diligent about gathering your information, preparing it carefully and following through on details. During a Chapter 7 bankruptcy, a court appointed attorney known as a trustee will manage and administer the bankruptcy case, the trustee ensures that both the creditor's and debtor's interests are maintained in accordance with the rule of law. The Trustee may decide that some of your assets must be liquidated to satisfy your creditors. You may be able to keep some personal items and possibly real estate depending on the law of the state where you live.
Chapter 13 Bankruptcy is also known as a, "wage-earner" bankruptcy. With the help of a bankruptcy attorney you would file a proposed Chapter 13 Repayment Plan to the court.
In a Chapter 13 Bankruptcy you can usually keep your property, but you must have regular income and may not have more than a certain amount of debt as set forth in the Bankruptcy Code. Repayment plans in Chapter 13 can range from 10% to 100% depending on the debtors income and the amount and nature of the debt.
The Court must approve your Chapter 13 Repayment Plan and your budget. If approved, a trustee is appointed and will collect the payments from you, pay your creditors and make sure you live up to the terms of your repayment plan. Your Chapter 13 Bankruptcy must be completed within three to five years. You will also be required to submit updated financial statements to the court annually.
Chapter 13 Bankruptcy has so many unwritten rules and local customs that you should seriously consider seeking a bankruptcy attorney.
If bankruptcy is the right solution for you, ultimately your bankruptcy will be discharged by the court.
A discharge is a Court order, which states that you do not have to repay the debts included in your bankruptcy filing. Some debts cannot be discharged.
Debts that cannot be discharged include:
- Most taxes;
- Child support;
- Alimony;
- Most student loans;
- Court fines and criminal restitution;
- Personal injury caused by driving drunk or under the influence of drugs.
The discharge only applies to debts that originated before the date you filed your bankruptcy petition. All property and debts must be listed on your bankruptcy schedules. If the Judge finds that you received property inappropriately that particular debt may not be discharged.
The Judge can also deny your discharge if you do something dishonest in connection with your bankruptcy case such as destroy or hide property, falsify records, or lie, or if you disobey a Court order.
Some creditors hold a secured claim (for example, the bank that holds the mortgage on your house or the loan company that has a lien on your car). You do not have to pay a secured claim if you included that debt in your filing and it is discharged. However, the creditor can and most likely will take the property. You can voluntarily keep any debt you wish to continue paying.
If you decide to pay a debt you will have to sign a reaffirmation agreement.
It is important to list all your property and debts in your bankruptcy schedules, and a reaffirmation agreement is a promise to pay a debt included on your bankruptcy schedules. Some individuals may have special reasons as to why they want to keep a particular debt "out" of their bankruptcy filing and ultimately pay it via a reaffirmation agreement. For example, you may want to work out a plan with the bank to keep your car. To promise to pay that debt, you must sign and file a reaffirmation agreement with the Court. Keep in mind reaffirmation agreements are under special rules and are voluntary.
Reaffirmation agreements are not required by bankruptcy law or by any other law. Reaffirmation agreements:
- Must be voluntary;
- Must not place too heavy a burden on you or your family;
- Must be in your best interest; and
- Can, be canceled anytime before the Court issues your discharge or within 60 days after the agreement, is filed with the Court, whichever gives you the most time.
If you are an individual and an attorney does not represent you the Court must hold a hearing to decide whether to approve the reaffirmation agreement. The agreement will not be legally binding until the Court approves it.
If you reaffirm a debt and then fail to pay it, you owe the debt the same as though there was no bankruptcy. The debt will not be discharged and the creditor can take action to recover any property on which it has a lien or mortgage. The creditor can also take legal action to recover a judgment against you.
The good news is, even after a bankruptcy, you may not have to survive without credit. Filing bankruptcy does not prevent you from getting new credit. In fact, some lenders market their service to recently bankrupt individuals or families. Furthermore, the Bankruptcy Code protects debtors from discrimination based solely on a bankruptcy filing.
Legally your credit cannot be terminated or a credit application denied solely because you are a debtor in a bankruptcy proceeding. However, you can be turned down based on your total financial history.
Before you begin creating new debts it is wise to remember that too much credit may be the very thing that led you to bankruptcy in the first place. Most experts suggest that in the first couple of years after a bankruptcy you avoid making any substantial financial changes. Bankruptcy is designed to lift the financial burden from your shoulders and give you a fresh start to re-build your credit.
The first step to rebuilding your credit is to stop listening to people tell you that you have ruined your credit for life. This statement is untrue. Any bad decisions and the overspending that initially got you into serious debt are now behind you. Bankruptcy can mean a new beginning. You are now ready to build a new financial life for yourself and your family. Once your debts have been discharged it is very important that you begin to re-establish a good credit rating.
There are two options for re-establishing new credit. Such as:
>You could apply for a loan to purchase a car. If you have filed bankruptcy you may need to ask a family member, a friend or your employer who has good credit to co-sign with you. This auto loan will appear on your credit report as a joint account (with the person who co-signed for you). As you make your car payments each month the bank will report those payments as "current." This will demonstrate to future credit lenders that you can handle "installment credit payments" responsibly. Be sure to make the payments on time every month.
>You could also apply for a Secured Credit Card from your bank. As you charge purchases on the secured credit card your balance will be reported to your credit report. As you make on-time monthly payments the credit card company will report those on-time payments as current. This will demonstrate to future credit lenders that you can handle "revolving credit payments" responsibly each month. You need to be sure you pay these amounts in full every month. If you are carrying balances on your credit cards then you are most likely not acting in a financially prudent manner. Credit cards are a convenience, not a loan, and their balances are to be paid immediately. Take what you have learned and be sure not to fall back into old habits. Credit cards are useful if used properly.
Patience is important in this process of rebuilding a good credit history. Remember when you sign an application for a credit card or a loan, you are legally responsible to pay back the money you borrowed on time and with interest. We recommend that you slowly develop your new credit history. Do not make the mistake of applying for too many credit cards or for a loan that is larger than you can handle. Start slowly, be responsible when spending money, keep track of how much you spend, and most importantly, pay your bills on time.
Another requirement of the new bankruptcy law is that all individuals filing a bankruptcy petition must attend a mandatory personal finance instructional course (Debtor Education) prior to receiving their bankruptcy discharge. The required Debtor Education course is to be completed within 45 days after the meeting of your creditors, this meeting is commonly referred to as the 341 meeting.
Click here to view a copy of the court notice that outlines where to find the court-order completion date for the debtor education.
Some Bankruptcy Terms you will here are:
- What is Disposable Net Income?: Disposable Net Income is the amount of money that you are left with after you pay all your monthly living expenses subtracted from your monthly net income. This is called positive cash flow.
- What is a Deficit?: A deficit occurs when your monthly living expenses are more than your monthly net income. Some consumers use their future paycheck to pay for past due bills and living expenses. This is called negative cash flow.
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